We believe investment-grade debt could lead the credit markets in the early stage of recovery, with the Fed and ECB providing policy backstops if necessary.

Key Takeaways

COVID-19’s combination of mortality and contagiousness has led to an unprecedented shock to the global economy.

Western Asset is tracking a range of potential COVID-19 therapies; while we expect incremental progress in improving medical outcomes, we do not necessarily expect a game-changing treatment in the near-term.

A rapid and massive response from global policymakers has stabilised global markets and set the table for an economic recovery once containment measures have abated.

With data about the virus showing promising trends, we are already witnessing a global movement toward the relaxing of social distancing and we anticipate containment measures being loosened across developed markets over the next two to four weeks.

Western Asset expects a sharper economic recovery from the COVID-19 crisis than we saw following the global financial crisis given the self-imposed nature of the current crisis and the subsequent policy response.

Investment-grade credit is at the top of our opportunity list given historically wide valuations and central bank backstops.

“Now that policymakers have hopefully stabilised financial markets with historic amounts of monetary and fiscal firepower, our task force’s focus is on the path and pace of the economic recovery.”

Western Asset

Looking back to the beginning of 2020, Western Asset’s outlook was for a gradual expansion of global growth, supported by low inflation and dovish central bank policy. That outlook has obviously been derailed by COVID-19 and the impact of virus containment measures that have brought the global economy to a screeching halt. Today’s self-imposed shutdown has resulted in an economic downturn unsurpassed in history due to its rapidity if not also severity, which has manifested itself as stress in different parts of the capital markets. Now that policymakers have hopefully stabilised financial markets with historic amounts of monetary and fiscal firepower, our task force’s focus is on the path and pace of the economic recovery. In this piece, we will discuss the virus and government response before moving on to containment relaxation, the economic outlook and Western Asset’s resulting investment strategy.

Understanding and Treating COVID-19

While much has been written about it over the past several months, very few certainties are yet known about SARS­CoV-2 and the disease it causes, COVID-19. While we wait for more robust clinical data in coming months, the task force has been focused on the following key aspects of the virus, which will strongly influence the duration and severity of containment measures:

Mortality—Concern about COVID-19 emanates from its ability to kill a portion of the infected population. Initial reports of death rates in the 3%-7% range were extremely worrisome, although a lag in testing capacity has meant that many patients with milder symptoms were not counted in the denominator of the calculation. Today, our best estimate of COVID-19’s mortality rate is 0.5-1.0%, which is still elevated versus a 0.1% rate for the seasonal flu.1 We expect reported rates to continue to decline as testing expands, and the rollout of broad serological testing for virus antibodies could end up finding a larger than expected infected population. In addition to COVID-19 risks the average patient faces, mortality rates are known to be higher in vulnerable populations (e.g., the elderly, immunocompromised, diabetics, etc.). This has been compounded by worries over mortality increasing even further in regions with strained health care resources, which necessitated the rapid deployment of containment measures in March.

Contagiousness (R0)—While SARS-CoV-2 is not estimated to be as contagious as some other viruses such as measles or chickenpox, its R0 factor which describes how many additional patients are infected by a single patient may be as high as 5.7,2 well above the level of the seasonal flu and 2009’s H1N1 swine flu. Importantly, SARS-CoV-2 appears to be particularly infectious early in a patient’s incubation period. This allows for the increased possibility of rapid transmission from unsuspecting patients. Early projections of the virus’ spread around the globe were based on this relatively high R0; however, containment measures and social distancing have been effective in slowing the progress of the virus, shifting its R0 much lower. Even as containment measures are relaxed over the coming months, we would still expect the virus’ R0 to stabilise at lower levels given the likely persistence of social distancing.

“While daily headlines continue to tout potential treatments, the task force is taking a cautious approach to the probability of a game-changing cure given the lengthy and risky nature of the drug development process.”

Western Asset

The following chart compares the mortality and contagiousness of historical epidemics.3 While COVID-19 doesn’t stand out as a particularly deadly disease, the combination of these factors, combined with asymptomatic trans­mission, has caused it to be more of a problem for the global economy than was SARS or MERS.

Exhibit 1: Pandemic Comparison

Source: WA estimates, NY Times, NEJM, CDC. As of 27 Apr 20. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Impact on Health Systems—In addition to elevated mortality, COVID-19 causes respiratory distress in many patients that requires hospitalisation, ICU treatment, and/or ventilation. Approximately 8% of diagnosed COVID-19 patients in the US required hospitalisation as of April 17, 2020,4 compared to an estimated patient hospitalisation rate of 0.45%5 for 2009’s H1N1. The fear that a finite amount of health system resources would be overwhelmed by COVID-19 patients helped provoke the sharp lockdown response in many countries, and the adequacy of health infrastructure will remain a focus as policymakers consider relaxing containment in the coming weeks and months.

Mutation—Like its cousins SARS and MERS, SARS-CoV-2 is a coronavirus that exhibits different behavior than smaller viruses such as rhinovirus (common cold). While SARS-CoV-2 appears to be much deadlier than the seasonal flu, RNA sequencing of patients’ viruses has suggested that coronaviruses mutate at a slower pace than peers such as the constantly evolving influenza A. While there is still risk that SARS­CoV-2 could mutate into a more (or less) deadly virus over the next year, our base case is that we will be living with the current virus for the foreseeable future, which lends hope for specifically targeted solutions such as vaccines.

As scientists continue to learn more about SARS-CoV-2, the next focus will be finding treatments that can mitigate mortality risk from COVID-19. While daily headlines continue to tout potential treatments, the task force is taking a cautious approach to the probability of a game-changing cure given the lengthy and risky nature of the drug development process. We would highlight that potential drugs have to cross a number of hurdles to be able to be used by the general public, including: 1) having a demonstrated safety profile, 2) being proven effective and 3) navigating the lengthy time involved in the regulatory approval process. So unfortunately, it’s not a given that COVID-19 will be effectively treated or cured in the medium-term.

With a number of treatments and vaccines in development and in clinical trials, we observe the following:

Existing FDA-approved treatments (e.g., tocilizumab) are important to watch, given that they have an established safety profile and can be immediately prescribed “off-label.” The FDA appears poised to approve the emergency use of some drugs with existing safety data, as it recently did with Gilead’s Phase 3 antiviral drug remdesivir.

Most COVID-19 drug studies published to date have not been run with blinds and controls, making statistical significance of reported results unclear. However, more robust clinical trials are underway and data will be available in months, compared to years for lengthy cancer and cardiovascular trials.

Similar to the Spanish flu, some younger patients appear to be vulnerable to an overactive immune response called cytokine release syndrome (CRS), which could be a promising line of research and treatment. There has also been news of blood clotting and strokes in COVID-19 patients, which illustrates how the virus is attacking multiple systems in the body, not just the lungs.

Exhibit 2 compares our estimate of the promise of different categories of COVID-19 treatments with the likely time to market. While existing antivirals, such as remdesivir, currently being tested appear to be the most promising near-term approach to COVID-19, more targeted therapies that address either the body’s overactive immune re­sponse or the virus itself (vaccine) may be more effective in permanently dampening the mortality risk of COVID-19. Herd immunity, in which a major portion of a society’s population has been infected and can’t pass the virus to other patients, has been suggested as a long-term solution to the crisis. However, our estimates of total infected populations in the worst-afflicted regions (e.g., 10% in Spain and 23% in New York state6) are well below effective levels of herd immunity (i.e., 60%-90%).

“… despite the speed at which the COVID-19 market meltdown unfold­ed in March 2020, we saw both the US Federal Reserve and the European Central Bank re­spond quickly with a combination of rate cuts …”

Western Asset

The Global Policy Response

One unintended consequence of the global financial crisis (GFC) was that central bankers and government officials were forced to become familiar with an expanded toolbox of counter-cyclical policy tools, including quantitative easing (QE) and asset purchase programs. As a result, despite the speed at which the COVID-19 market meltdown unfolded in March 2020, we saw both the US Federal Reserve (Fed) and the European Central Bank (ECB) respond quickly with a combination of rate cuts (Exhibit 3, chart on left), liquidity provision to banks, and asset purchase programs supporting both consumer and corporate credit asset classes (e.g., SMCCF and PEPP). These moves stabilised stressed financial markets that in mid-March showed signs of forced deleveraging. Particularly notable has been the Fed’s expansion of its Secondary Market Corporate Credit Facility (SMCCF) in early April to include high-yield rated ETFs and fallen angels. Even policymakers in emerging market (EM) countries, whose toolkits are somewhat more limited, have responded with rapid interest rate cuts (Exhibit 3, chart on right).

Exhibit 2: Comparison of Therapeutic Approaches to COVID-19

Source: Western Asset estimagess. As of 27 April 20. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Exhibit 3: Central Banks Acted Swiftly to Combat COVID-19 Effects

Source: (A) Federal Reserve. As of 31 Mar 20. (B) Bloomberg. As of 27 Apr 20. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

While central bankers are typically able to act unilaterally to provide support to the market in times of need, in­creasing government spending can be a much more laborious process given the political hurdles involved. Despite this, we have seen a large fiscal response from the US and European countries to try to soften the brutal impact of COVID-19 lockdowns on their respective economies (Exhibit 4). As discussed later, this wartime-type deficit spending may have an impact on future balance sheet quality and funding costs.

Exhibit 4: Developed World Fiscal Response

Source: (A) Gavekal. (B) UBS, Western Asset calculations. As of 20 Apr 20. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

1Appropriations; does not include contingent liabilities such as guarantees. 2Italy is proposing another round of fiscal stimulus worth about 3 percent of GDP. 3Very approximate.

“One question that has frequently been asked is why policymakers locked down the global economy for COVID-19 but have not for seasonal flu or the 2009 H1N1 pandemic that infected as many as 60 million Americans.”

- Western Asset

The Roadmap to Relaxing Containment

Before we discuss the critical topic of when and how economies will start to relax the punishing COVID-19 con­tainment measures currently being implemented, it’s important to consider how we got here in the first place. As discussed earlier, COVID-19 is not extraordinarily fatal or contagious as compared to many communicable diseases experienced over the past century. One question that has frequently been asked is why policymakers locked down the global economy for COVID-19 but have not for seasonal flu or the 2009 H1N1 pandemic that infected as many as 60 million Americans. COVID-19’s combination of mortality rate (5x-10x higher than the seasonal flu), hospitalisation rate (estimated to be 40x higher than 2009’s H1N1), and communicability (high R0 and ability to be passed by asymptomatic patients) led experts to predict that health systems would be overwhelmed if the virus continued to spread unabated. While estimates of needed hospital utilisation, ICU beds and ventilators have steadily declined over the past several weeks, we view this trend as a sign that containment measures have worked, rather than an indicator of an overzealous response.

“While estimates of needed hospital utilisation, ICU beds and ventilators have steadily declined over the past several weeks, we view this trend as a sign that containment measures have worked, rather than an indicator of an overzealous response.”

Western Asset

Intuitively, the containment measures implemented around the globe over the past four to six weeks should have drastically shrunk the virus’ R0 and thus its spread. While COVID-19 death data has trended down, it’s a highly lagging indicator given the three to four weeks it takes a patient to show symptoms, develop respiratory problems and be hospitalised. We are instead focused on the number of patients being infected today, which we believe has fallen precipitously and could effectively reach zero over the next month in regions that implemented effective containment measures. The map below from health think tank IHME shows estimated dates when different US states will reach infection levels below one patient per million.

Exhibit 5: State Containment Easing Projections

Source: IHME. As of 29 Apr 20 Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Once the virus is seen as potentially having been eliminated from certain populations in the US and Europe in the near-term, the next step will be to gradually release containment measures while ensuring that new cases won’t break out again. While we acknowledge that there are political considerations involved in the discussion, we believe that there is general agreement about what will be required to get containment relaxed and the global economy moving again (Exhibit 6).

Exhibit 6: Target Conditions for Containment Relaxation

Source: Western Asset This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

It’s important to note that not all countries and regions have taken the same approach to COVID-19 containment. While densely populated developed market countries such as Italy, Spain and the US have all generally implemented “stay-at­home” policies with schools cancelled and only essential businesses operating, Sweden is an outlier. The Scandinavian country has taken a more hands-off approach to the virus, with many schools and businesses still open, and economic activity not as depressed as in many of its peers. While Sweden benefits from a particularly low population density and small average household size, the country has seen COVID-19 infections and deaths creep up in recent weeks (Exhibit 7), and time will tell whether its approach was prudent.

“While official COVID-19 cases and deaths [in Mexico] are still relatively small, indirect measures of the virus such as respiratory infection rates and unexplained deaths suggest that the virus may be spreading rapidly.”

- Western Asset

Exhibit 7: COVID-19 Daily Trends in Sweden

Source: Bloomberg As of 30 Apr 20 Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

On the other hand, many EM countries have simply not had the resources or government effectiveness to stop the virus. Mexico is an example of a country that wasn’t proactive about trying to reduce virus transmission. While official COVID-19 cases and deaths there are still relatively small, indirect measures of the virus such as respiratory infection rates and unexplained deaths suggest that the virus may be spreading rapidly. Given divergence in containment approaches and virus trends across countries and regions, we expect international travel to remain depressed in coming months, which will have an impact on industries such as airlines and tourism.

The Shape of the Recovery

Compared with economic cycles that result from downturns in corporate spending, it’s clear that today’s COVID-19 crisis is both steeper and more artificially created, which has both positive and negative implications for the recovery. The steepness of the downturn has accentuated the damage across the global economy as some industries have completely shut down and consumer spending has retrenched. For example, unemployment trends reported in the US over the past month (30 million jobs lost so far and an estimated 16% unemployment rate in April) have been historic in scale. At the same time, the fact that economic pain observed so far has been driven by policy measures rather than cyclical consumer or corporate behavior suggests that a combination of positive virus data and containment relaxation could promote a sharper-than-typical recovery.

Exhibit 8 compares the US GDP growth rate decline of the 2008-2009 global financial crisis with the market’s expectation for the growth impact of today’s pandemic. Our current expectation is for a steeper downturn than during the early quarters of the GFC, as illustrated by recent data that showed US real GDP shrank by 4.8% in 1Q20. With containment measures having suppressed economic activity in April, it’s clear that 2Q20 global GDP will also be very weak. However, we believe that economic activity should start rebounding in May/June, and we expect 3Q20 to show sequential progress. Assuming that return-to-work measures outlined above are effective and infections remain low, we anticipate that utilisation will increase across large parts of the economy in 4Q20, with 2021 showing a more broad-based recovery that includes more consumer sectors. We do remain cautious on sectors that may be vulnerable longer-term to social distancing and changed consumer behavior, such as travel, entertainment and sports.

Exhibit 8: US Recessions Compared by Quarter

Source: Bloomberg historical and consensus estimates. As of 30 Apr 20. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

“… China’s drastic lockdown in early 2020 and subsequent rebound can be a case study for the shape of the recovery elsewhere.”

Western Asset

While we acknowledge that damage to both consumer and corporate balance sheets could provide headwinds to the idea of a quicker rebound than seen following the GFC, it’s important to note that the US and European banking sectors entered the current downturn with approximately three times more Tier 1 common equity than they had before the GFC.7 Furthermore, the government policy response has been both rapid and enormous in scale. These differences should help support the recovery once the global economy is unshackled from con­tainment measures.

While most of the global economy has been fairly synchronised in the timing of containment measures and the resulting slowdown in economic activity, China’s drastic lockdown in early 2020 and subsequent rebound can be a case study for the shape of the recovery elsewhere. Exhibit 9 shows the robust recovery in Chinese economic activity as lockdown measures have been relaxed in recent months, with industrial utilisation showing 80%-100% of normal activity.

Exhibit 9: China’s Recovery as a Case Study

Source: Gavekal. As of 01 May 20 Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

Global markets are now over a month past the mid-March panic of drawdowns and forced deleveraging that was ultimately stabilised by unprecedented central bank backstops. Both the pace and scale of market moves have been historic, but we’ve also seen significant rebounds in some asset classes, as described in Exhibit 10.

Exhibit 10: Post-Virus Market Changes

Source: Bloomberg. As of 30 Apr 20 Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

While we believe that we can see the light at the end of the containment tunnel, this doesn’t necessarily mean that it’s time to load up on the highest beta or riskiest parts of the credit markets. Our long-tested approach to value investing reflects both risk and reward considerations, and we currently believe that investment-grade credit reflects the best risk-adjusted return opportunities in the market today given low historical default rates, reces­sion-level spreads and central bank buying. We are complementing purchases of higher quality spread product with an emphasis on front-end US Treasury duration given the likelihood that the Fed and ECB will remain vigilant in fighting deflation risk through anchored policy rates and QE, even if long-term inflation starts to be more of a concern for the market.

Exhibit 11: Post-COVID-19 Spread Sector Priorities

Source: Western Asset. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

While many credit sectors, including high-yield, EM and structured products, face fundamental headwinds during the current environment that could lead to elevated credit losses, we believe that investment-grade (IG) credit is already pricing in a severe default scenario at spreads of roughly 200 basis points (Exhibit 12). We expect IG to lead the credit markets in the early stage of the economic recovery, and that buying from both the Fed and ECB will provide downside protection in the event of a slower than expected rebound. Notably, the Fed’s willingness to add future fallen angels to its IG-rated bond purchases under the SMCCF effectively places future IG credit risk on the central bank’s balance sheet.

Exhibit 12: Investment Themes–Corporate Bonds

Source: (A) Bloomberg Barclays. As of 30 Apr 20. (B) Moody's, Bloomberg Barclays, Bloomberg. As of 30 Apr 20. ¹Calculation assumes 25 bps liquidity premium. 2As of 31 Dec 19. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

“As the recovery progresses, we fully expect lower-rated asset classes to benefit and we will be constantly evaluating relative value to determine whether reallocations are merited.”

Western Asset

As discussed by our CIO Ken Leech in his 2Q20 Market & Strategy Update webcast, given displaced valuations and changing fundamentals, the Firm has updated its asset allocation in many strategies to reflect this updated prioritisation of opportunities. For example, Western Asset has reduced EM foreign currency positioning, which is more vulnerable to ongoing growth challenges, in favor of IG credit. As the recovery progresses, we fully expect lower-rated asset classes to benefit and we will be constantly evaluating relative value to determine whether reallocations are merited.

Risks to the Recovery

A discussion of COVID-19’s aftermath would not be complete without the task force acknowledging the risks that global investors face going forward. In terms of the virus itself, the economic impact of containment measures could be extended by breakouts such as we are currently seeing in Singapore, or a mutation of the virus that makes it harder to defeat. Collateral damage from the rapid deceleration of the global economy could permanently dam­age consumer and corporate balance sheets, while drastically increased government debt loads (Exhibit 13) could challenge future funding costs. Lower on our list of risks, but still worth mentioning, would be a spike in inflation caused by the extraordinary levels of QE and even debt monetisation being observed globally.

Exhibit 13: US Debt Projected to Approach 100% of GDP

Source: Bloomberg, CBO, CRFB. As of 30 Apr 20 Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

“Western Asset’s Coronavirus Task Force continues to evaluate the impact of COVID-19 on a daily basis including virus data and policy, the trajectory of economic growth and the evolution of the investment opportunity set.”

- Western Asset

From a long-term perspective, we believe that a combination of extended containment measures and changes in consumer behavior will alter the economic landscape that existed at the beginning of 2020. It’s clear that consumer-facing industries such as restaurants, movie theatres, sporting events and tourism will face secular challenges as social distancing persists and/or consumers embrace digital alternatives. From a corporate standpoint, increased familiarity with working from home and video meetings could displace business travel and real estate demand in the medium-term. Western Asset is already using its deep bottom-up resources and credit sector specialists to analyze the potential impact of these changes on industry and issuer fundamentals as well as on overall economic growth.

The Path Forward

Western Asset’s Coronavirus Task Force continues to evaluate the impact of COVID-19 on a daily basis, including virus data and policy, the trajectory of economic growth and the evolution of the investment opportunity set. While we do not yet believe that the global economy is completely out of the woods, positive trends in virus data combined with unprecedented monetary and fiscal support are setting the table for a recovery beginning in 2H20. Our thoughts remain with you and your families as we all progress through this challenging time, and we hope to continue to serve as your COVID-19 resource for fixed-income investing.

COVID-19 is the World Health Organization's official designation of the current novel coronavirus disease. The virus causing the novel coronavirus disease is known as SARS­CoV-2.

Social distancing is deliberately increasing the physical space between people to avoid spreading illness.

The Great Recession, also known as the financial crisis of 2007–08, the Great Financial Crisis (GFC), global financial crisis and the 2008 financial crisis, was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared.

Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody’s Investors Service and AAA, AA, A and BBB by Standard & Poor’s Ratings Service, or that have an equivalent rating by a nationally recognized statistical rating organization or are determined by the manager to be of equivalent quality.

A central bank is a national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing the government's monetary policy and issuing currency.

Backstop is a term used in the financial industry to mean credit support or backup funds for a financial instrument or transaction.

The basic reproduction number R0, also called the basic reproduction ratio or rate or the basic reproductive rate, is an epidemiologic metric used to describe the contagiousness or transmissibility of infectious agents. R0 is affected by numerous biological, sociobehavioral, and environmental factors that govern pathogen transmission and, therefore, is usually estimated with various types of complex mathematical models, which make R0 easily misrepresented, misinterpreted, and misapplied.

Novel H1N1 influenza: A virus responsible for a flu pandemic in 2009 that was originally referred to as "swine flu" because many of the genes in this new virus were very similar to influenza viruses that normally occur in pigs in North America. However, the virus is actually a novel influenza A (H1N1) virus.

Severe acute respiratory syndrome (SARS) is a viral respiratory illness caused by a coronavirus called SARS-associated coronavirus (SARS-CoV). SARS was first reported in Asia in February 2003. The illness spread to more than two dozen countries in North America, South America, Europe, and Asia before the SARS global outbreak of 2003 was contained.

MERS-CoV refers to a viral respiratory illness — Middle East respiratory syndrome (MERS) — that's caused by a coronavirus (CoV), the same family of viruses that can cause the common cold.

Type A flu or influenza A viruses are capable of infecting animals, although it is more common for people to suffer the ailments associated with this type of flu. Wild birds commonly act as the hosts for this flu virus. Type A flu virus is constantly changing and is generally responsible for the large flu epidemics.

The Food and Drug Administration (FDA) is a government agency established in 1906 with the passage of the Federal Food and Drugs Act. The agency is separated into divisions that oversee a majority of the organization's obligations involving food, drugs, cosmetics, animal food, dietary supplements, medical devices, biological goods, and blood products.

The Spanish flu, also known as the 1918 flu pandemic, was an unusually deadly influenza pandemic caused by the H1N1 influenza A virus. Lasting more than 12 months from spring 1918 (northern hemisphere) to early summer 1919, it infected 500 million people – about a third of the world's population at the time.

Quantitative easing(QE) refers to a monetary policy implemented by a central bank in which it increases the excess reserves of the banking system through the direct purchase of debt securities.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

The Primary Market Corporate Credit Facility (PMCCF) was established to support credit to large employers for bond and syndicated loan issuance. The Secondary Market Corporate Credit Facility (SMCCF) was established to support credit to large employers by providing liquidity for outstanding corporate bonds.

The Pandemic Emergency Purchase Programme (PEPP) is a €750 billion ECB initiative that will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The Institute for Health Metrics and Evaluation (IHME) is an independent population health research center at UW Medicine, part of the University of Washington, that provides rigorous and comparable measurement of the world's most important health problems and evaluates the strategies used to address them.

Gross Domestic Product (“GDP”) is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.

Duration is a measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. It is calculated as the weighted average of the present values for all cash flows.

Gavekal is one of the world's leading independent providers of global investment research. It also advises a select range of funds and offers software solutions for the financial community.

Deleveraging refers to decreasing financial leverage; most often via paying off existing debt.

Spread product refers to taxable bonds that are not Treasury securities and include securities such as agency securities, asset-backed securities, corporate bonds, high-yield bonds and mortgage-backed securities.

Remdesivir is a broad-spectrum antiviral medication developed by the biopharmaceutical company Gilead Sciences. As of 2020, remdesivir is being tested as a specific treatment for COVID-19, and has been authorized for emergency use in the U.S. and approved for use in Japan for people with severe symptoms. It may shorten the time it takes to recover from the infection. Treatment is given by injection into a vein.

Hydroxychloroquine is used to prevent or treat malaria caused by mosquito bites. The United States Centers for Disease Control provides updated guidelines and travel recommendations for the prevention and treatment of malaria in different parts of the world.

The federal funds rate (fed funds rate, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

Spreads of the Bloomberg Barclays U.S. Corporate Investment Grade Index is an unmanaged index consisting of publicly issued US Corporate and specified foreign debentures and secured notes that are rated investment grade (Baa3/BBB- or higher) by at least two ratings agencies.

US HY Spreads (bps)

Spreads of the Bloomberg Barclays U.S. Corporate High Yield Index covers the universe of fixed rate, non-investment grade debt, including corporate and non-corporate sectors.

US Equities (SPX Index)

The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

WTI Crude ($/bbl)

West Texas Intermediate (WTI), also known as Texas light sweet, is a grade of crude oil used as a benchmark in oil pricing. This grade is described as light because of its relatively low density, and sweet because of its low sulfur content. It is the underlying commodity of Chicago Mercantile Exchange's oil futures contracts.

Henry Hub Gas ($/mcf)

Henry Hub is a natural gas pipeline located in Erath, Louisiana, that serves as the official delivery location for futures contracts on the New York Mercantile Exchange (NYMEX). The hub is owned by Sabine Pipe Line LLC and has access to many of the major gas markets in the United States.

U.S. Treasury Inflation Protected Securities (“TIPS”) are bonds that receive a fixed, stated rate of return, But they also increase their principal by the changes in the CPI-U (the non-seasonally adjusted U.S. city average of the all-item consumer price index for all urban consumers, published by the Bureau of Labor Statistics). TIPS, like most fixed income instruments with long maturities, are subject to price risk.

A fallen angel is a bond that was rated investment-grade but has since been downgraded to junk status due to the declining financial position of its issuer. The bond is downgraded by one or more of the big three rating services.

The “CARES Act” is short for the ''Coronavirus Aid, Relief, and. Economic Security Act''.

Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.

The Congressional Budget Office (CBO) is a federal agency within the legislative branch of the United States government that produces independent analyses of budgetary and economic issues to support the Congressional budget process.

The Committee for a Responsible Federal Budget (CRFB) is an independent, non-profit, bipartisan public policy organization based in Washington, D.C. that addresses federal budget and fiscal issues.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

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The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested.

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Past performance is no guarantee of future results. Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

Important Information:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice. Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

This material is only for distribution in those countries and to those recipients listed.

Investors in Switzerland:The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China (“PRC”):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC. The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission. Investors should read the offering document prior to any subscription. Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only. Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia and New Zealand:

This document is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827). The information in this document is of a general nature only and is not intended to be, and is not, a complete or definitive statement of matters described in it. It has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person.